As a legal blogger and tax law enthusiast, I feel it is part of my duty to make you aware of your tax obligations to the state. And if Berkeley Assemblywoman Nancy Skinner has her way, you might have a new obligation to be made aware of.
Well, really, it’s not so much a new obligation as it is an improvement in enforcing an already existing obligation. Online shopping is a huge part of retail sales, and many customers choose to shop online to avoid paying sales tax. While some retailers do collect sales tax based on where the items purchased are being ordered from, other sites continue to charge no sales tax. In a state like California, where the sales tax is nearly 10%, avoiding that tax can be a huge money-saver. The problem is that while most people are familiar with sales tax (and how to avoid it), they are unfamiliar with its close cousin, use tax.
The idea behind use tax is that you shouldn’t be able to avoid your tax burden because you ordered something from out of state. If you didn’t pay a state sales tax on the item, then you need to report it at the end of the year. In theory, anyway. Most people fail to report any use tax, probably because most people don’t know that they’re supposed to.
We all know that California is seriously in need of some money. In fact, the East Bay Express reports that the state will run out of cash this week. A boost in sales tax revenue would definitely help. The law that Nancy Skinner is proposing will require online retailers to collect California sales tax when someone in California orders an item. This would bring the state all the revenue from the sales tax that it was supposed to receive all along but wasn’t because of the lack of use tax reporting.
The law is based on a similar law that was passed in New York last year. The so-called “Amazon tax” was challenged in court by Amazon.com, but was upheld this January, setting a persuasive precedent for similar laws in the future. There is still a possibility that the law will be appealed and overturned, but for now, Amazon is collecting New York sales tax.
Amazon has threatened to cut ties with websites it advertises on that are based in California if the law is passed here. By doing so, Amazon hopes to prove it does not have a physical presence in the state. In 1992, the United States Supreme Court ruled that a mail order company does not have to collect state sales tax from states in which it does not have a physical presence. It is unclear whether or not this rule should apply to online retailers in the same way. Amazon is also arguing that these laws are unconstitutional because they violate the Commerce Clause, among other things.
Amazon also claims that it is too complicated to calculate sales tax for every state, county, and municipality across the country. Though it might be complicated, advances in software have made is possible, as evidenced by Amazon’s ability to collect sales tax on all purchases made at Target.com, which Amazon runs.
It will be interesting to see how this plays out. Hawaii and North Carolina are considering similar laws. With so many other states unable to balance their budgets, I don’t think it will be long before they follow suit and push for their own versions of the “Amazon tax.”